LIRA Regrets

The article “LIRA Regrets” was originally published on MoneySense on November 14, 2017.

This woman’s husband transferred his workplace pension to a high-fee LIRA and is looking for a smarter solution

Q: My husband worked for a municipality and when he left we transferred the money into a LIRA. I’ve realized that the MER (2.9%) and DSC (5.5%) are high and we are upset and want to consider moving the funds.

My husband is currently employed in another public sector that has a great pension plan (DB) and we are wondering if we can/should move the funds to that or perhaps move it elsewhere if it’s even possible?!

—Jen

A: When you leave an employer and decide to transfer your pension into a locked-in retirement account (LIRA), you’re taking a risk. The idea is to invest the money to provide a higher retirement income with the eventual withdrawals than the pension payments may have otherwise been.

In order for the strategy to pay off, you need decent investment returns. As you have noted, Jen, it’s very difficult, if not impossible, to earn decent returns paying a 3% management expense ratio (MER) on a retail mutual fund. This is particularly true in this low return, low-interest rate environment.

DSC or deferred sales charge fees are expenses to avoid at all costs. Some companies or advisors sell mutual funds that have a penalty if you sell in the first 5-7 years – a DSC fee. Even though most investors’ time horizons may be more than 5-7 years, there seems to be a correlation between high MER fees and mutual funds with deferred sales charges. By the time you realize you’re in expensive investments, deferred fees make it even more expensive if you want to get out of them.

You mention that your DSC fees are 5.5% if you want to sell, Jen. These fees may not apply to your whole investment as some of your fund units may have already become DSC-free based on the fund company’s declining DSC schedule. Just ask them.

If these fees were not explained properly to you guys before you invested, as is common from my experience, you may have a case for having them waived by the advisor or their company.

If you want to transfer the LIRA to your husband’s new employer, Jen, it may be possible. Pension plans sometimes allow current members to buy additional service based on eligible pensionable service with certain previous employers. Every plan is different, so check with his current employer first to see if this is possible.

The usual approach is to transfer money right from one pension plan to another. If you leave an employer with a pension and go to a new employer with a pension, they may allow a direct transfer between pensions. You’ve taken the long route, having transferred the former pension plan commuted value to a LIRA first. You may still be able to transfer money from the LIRA to the new pension plan. Your husband’s new employer would determine how much additional service and resulting pension entitlement that transfer would buy. It may not necessarily buy him the exact number of years of service your husband worked with his previous employer.

So, the first step for you, Jen, is to talk to your advisor. If the DSC fees weren’t properly explained to you, you may have an argument for having them waived. If you have no luck with the advisor, talk to his or her company. In the meantime, your husband should talk to his new employer to see if they will allow him to buy pensionable service for his time with his previous employer and if so, if they will allow a transfer from his LIRA.

If you can’t transfer the LIRA to the pension, you may want to consider at the very least moving into lower cost investments with your current advisor, Jen. If they can’t reduce the fees considerably, which may not be possible at a firm that recommends 2.9% deferred sales charge mutual funds in the first place, it may be worth paying the DSC fee to move the money to a lower cost investment solution elsewhere.

The good news is it sounds like you’ve caught onto the problem with high fees on your investments. Whether or not you can transfer the LIRA into the new pension remains to be seen, but lessons like this are sure to help you make better financial decisions going forward.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.